Sunday, December 31, 2006

My Wealth Builder version 1.1 will be officially launched on January 1, 2007.

For regular readers, you may have already noticed the changes, which have been gradually incorporated over the past month:

New Look. We have moved to a three column format that provides more convenience for the reader. The left side bar will contain subscription information and advertising - text and image ad links, and site sponsorship. Skip this section if you are not interested in third party ads. The right side bar is reserved for information and content links - related articles, archives, blogs of interest, and a Personal Finance Friends blogroll. To add your blog link as a Friend, follow these instructions.

New Content Organization. Post topics will be published according to day. Since My Wealth Builder has a variety of topics, readers can now choose which day to check the site. I have been posting according to this schedule since December 12, 2006 to be ready for January 1, 2007. Here is an outline of the My Wealth Builder posting schedule.

Monday

Strategy and Execution - This segment is about my objectives, goals, plans and implementation for building wealth.

Tuesday

Ideas You Can Use - This segment will include tips, techniques, or current deals that are in the market. A regular article will be a "Carnivals to Read This Week" post with a My Wealth Builder Carnival pick.

Wednesday

The Practice of Personal Finance - This segment will cover habits and practices that I believe are important for success. Topics such as Mastery of Financial Concepts, Career, and Education will be part of this section.

Reaping the Rewards - This segment will be about preparing for and then enjoying retirement. This section will also be about about stewardship - where we manage and enjoy the rewards of our wealth.

Saturday

Reflections and Musings - This segment is intended to give me the opportunity to write about a wide variety of topics, including reviews, op-eds, human interest stories, and humorous observations.

Sunday

New Realities and New Beginnings - This segment is about being agile as the dynamics of personal finance, career success, and the global marketplace are creating rapid change. This segment will include philosophies, strategies, tips and techniques for managing and staying ahead of change.

In an earlier post on Carninvals to read this week, I highlighted the Festival of Under 30 Finances , which was to post on 12/29/30. The week's edition of the Festival is now up and running at Beachgirl's Budget Blog. My Festival pick is 10 Questions that Determine your Financial Fitness posted at LifeTraining - Online. The questions cover important elements of having sound personal finances. If any question have an answer of "no," it may be a good candidate for a 2007 resolution:-)

Saturday, December 30, 2006

Here is my Q4 2006 Wealth Builder Ratio update. This update also represents results for the 2006 year. Overall, I am very happy with this year's results. For more details on the relevance of these ratios, please see this earlier post.

Ratio and Target

Q3 2006

Q4 2006

Comments

InvestmentIncome to Salary

Target=0.8

1.16

1.29

Stock investment returns (14% for S&P) and higher interest rates (5-6% on CDs) boosted this ratio. This year's result was excellent versus the abysmal 2005 ratio of 0.20.

Savingsto Salary

Target>20

14.6

15.0

The second half of the year stock market rally was the main contributor to the savings increase. We also save about 20% of our salary. The value of this ratio at beginning of 2006 was 13.3.

Debt to Salary

Target=0

1.71

1.63

Currently, our only debt is our home mortgage. We continued to make additional payments to reduce the mortgage principal. The value of this ratio at beginning of 2006 was 1.80.

My financial goals for next year are:

1. Continue to maintain an Investment Income to Salary ratio > 0.8.

2. Add 1.5 to my Savings to Salary Ratio for a year-end value of 16.5.

3. Reduce my Debt to Salary Ratio by 0.1 to 1.53.

(For reference, Salary refers to gross salary.)

Both #1 and #2 are directly correlated with how well my stock, bond, and CD investments do. If my investments return about 10% in 2007, I should be able to comfortably achieve these goals. To achieve #3, we'll need to make an additional payment equal to about 4% of our mortgage principal.

Since I remain bullish on the market, I expect to achieve these financial goals for 2007. If the market should become weak or turn downward, I will need to revise my investment strategies to continue to meet these goals.

Friday, December 29, 2006

Overall, I thought the Vanguard Retirement Calculator was a reasonably accurate estimator for how much is needed. It takes salary growth (due to inflation), social security payments, and life expectancy during retirement into account.

However, if one is more than 10 years from retirement, you may need to make an adjustment to one’s estimated salary. The calculator does not account for the possibility that your salary may grow faster than inflation during your early working years – e.g. due to promotions or job changes. For those that are 10 or more years from retirement, it may be necessary to project what your future salary may be and put the present value in the salary column. (For specifics on this economic-speak, see example #2 below.)

This calculator asks for the following information:

1. Household Income2. Percentage of Income Needed after Retirement3. Social Security Benefts4. Annual Pension Benefits5. Current Savings6. Annual Retirement Savings Contribution7. Annual Investment Returns8. Years Until Retirement9. Years in Retirement

After filling out the information, the calculator lets one know whether you have sufficient savings or the amount that one needs to save before retirement.

Example 1 – Will B. Retired is a 64 year old that will retire next year. Here is his information.

Income needed for retirement. $52,000 in year 1. The calculator shows that Will’s retirement income will be $48,786. Most of it is covered by Social Security and his pension. This situation is acceptable since Will is so close to retirement. However, the calculator recommends Will needs to save about $185,000 more to account for the possibility of higher inflation. Thus, Will savings is currently short and should work longer before retiring.

Example 2 – Em. S. Grad is 35 years old and plans to retire at 65. Em’s information is different that Wills in #3 (social security payments), #4 (assume there are no longer pensions), and #8 (30 instead of 1 year to retirement). In addition, Em expects to retire as a Division Manager, which has a current salary of $150,000.

Amount needed for retirement: $1,266,596 to enable $162,000 per year of retirement income. And the calculator judges that Em is on track to provide $152,036 per year, assuming Social Security payments increase at the rate of inflation. Thus, Em will need to save about $1250 more per year to reach his goal.

To account for a higher salary due to promotion or job change, I recommend that Em should use the present salary of the position he expects have in the future. For example, if Em expects to be a division manager when he retires, he should input the $150,000 salary of a division manager today. (For reference, I also changed the Social Security payment to the maximum of $36,864.) With this adjustment, here is what Em would need for a retirement nest egg: $6,708,059. This would represent the high side retirement savings target. For reference, this number is close to the T.Rowe Price calculator estimate of $7,427,816, which did not include Social Security payments.

Disclaimer: Examples are illustrative purposes only. Your results will vary with different inputs and assumptions. As with all retirement calculators, please consult with your financial advisor before taking any actions.

Thursday, December 28, 2006

Much has been written about Dividend Reinvestment Plans (DRIPs) being a great investment tool, especially for those who do not enough fund to buy round lots of stocks. I agree that DRIPs are a great way to get started in investing in stocks because DRIPs allow for small and fractional share purchases. I fully agree with the buy-side benefits of DRIPS.

My issue with DRIPs is on the sell-side and estate-side, specifically, the higher than normal amount of record keeping and paperwork that is needed.

Record Keeping Requirements to Sell. DRIPs allow purchasers to buy small round dollar amounts. In addition, the quarterly dividends will be used to purchase shares. In both cases, the purchase results in fractional share purchases and varying share amounts for the same dollar amounts. This isn’t a big issue if you don’t ever plan to sell the shares.

However, if you plan to sell the shares, you will need to have a detailed record of each purchase. If you make a monthly contribution to a DRIP, you will have 16 purchases to record a year, 12 from regular monthly investments and 4 from quarterly dividend payments. In addition, sales will be made with whole number of shares. Thus, additional calculations to combine the 16 yearly purchases and the reallocate the cost basis to full shares will be needed.

All this work will typically be needed for fewer than 100 shares of the stock. Compare this to a single purchase and sale of any number of shares from a stockbroker. One only needs to record the single purchase and no additional calculations are needed for the sale. For my one DRIP, I used Excel to summarize purchases over several years and do all the necessary calculations. Even with Excel, the effort was significantly higher than if I had simply made a purchase through a broker.

Transferring After Death. While this doesn’t concern one during one’s lifetime, it does have an impact on the executor of one’s estate. For each DRIP, the necessary paperwork will need to be filed. Typically, this includes a death certificate, letter of testamentary, new account forms, transfer of account forms and an instruction letter. Some of the forms will need notarization or Medallion guarantees from a bank. The forms need to be done for each DRIP, e.g. eight DRIP accounts requires eight sets of forms.

I have also personal experience with the executor element. We just completed all the estate management paperwork with a discount broker. It has taken four calls to the call center and two hours at a branch office to get all the papers and then fill them out. I have already invested a couple hours with the various DRIP call centers, some of which were not very helpful. After getting the forms, we are now in process of filling them out to open new accounts, transfer funds, and close out previous accounts. All necessary, important, AND time consuming.

In today’s world of low commission trades via discount brokers, I think the benefit of DRIPs is much lower. At less than $10 per trade (and as low as $0-$5 per trade), I can make small purchases at discount brokers, similar to those executed in a DRIP. And the record keeping is simplified by being in one account.

For those of you who already have DRIPs and haven't kept all the records, one solution is to donate the shares to a charitable organization and take a tax deduction. Although I did calculate all the purchase prices for my one DRIP, I am disposing of shares through charitable contributions for a triple tax benefit.

Wednesday, December 27, 2006

During my driving lifetime, I have owned, in chronological order, the family 13 year old hand-me-down, a sports sedan, a convertible, full size luxury car, and a full size pickup truck. While I have enjoyed all of these vehicles, my favorite is the truck because it is a great combination of practical and economical. Here the reasons I choose a truck as my top pick:

Better View, Safer Driving. I am seated above most drivers. By sitting at a higher elevation, I can see the overall traffic on the road much better. In particular, I can see the bad drivers and avoid being near them.

Savings on Delivery Charges. My truck has tremendous cargo capacity. I can haul just about anything, anywhere. We moved two chairs and a couch from my in-law’s house to ours using my truck. Fifty bags of mulch fit comfortably in the truck bed. We regularly haul large items home from Costco. Even a full size car couldn’t handle a quarter of the items I regularly transport.

Low Cosmetic Maintenance. For example, dings don’t matter to me. Even though the truck was purchased new, I have never worried about getting a ding, nick or scratch. My philosophy is, “It’s a truck.” Trucks are supposed to have dings, nicks and scratches. Or else it’s not a truck:-)

Overall, the truck has been a great everyday vehicle for me. It is a six cylinder, manual transmission, base model truck that is very reliable. It gets about 20 miles to the gallon, costs $22 for oil changes (only maintenance so far) at the dealer, and has saved me several local delivery charges.

My Carnival pick is No really … who does want to be a millionaire? from The Journal Blog. Its interesting premise is that most people don't want to be rich. While I agree that money won't guarantee happiness, the macro survey conclusion is contrary to my personal experience with people.

Contact me by making a comment to this post that includes your URL, Blog Title, and your age group - eg. 20's, 30's, 40's, etc. ..... or not specified. Age group categorization is being used to help direct readers to authors of similar age and is optional.

After I confirm your blog meets the criteria, I will add a link to it in the Personal Finance Friends section the following weekend.

Sunday, December 24, 2006

“Become a student of change. It is the only thing that will remain constant.” — Anthony J. D’Angelo

The pace of change is fast and accelerating. Change is happening everywhere - in personal finance, careers, business, and the global markets. Those that can not, will not, or choose not to change will experience the most difficulty. Here’s a book that inspires me to get through change as fast as I can.

Who Moved My Cheese by Spencer Johnson, M.D. is a motivational book about dealing with change. The story is about two Littlepeople, Hem and Haw. Their daily job is to go through a maze, find the cheese and eat it. Every day, same routine, same route, same great cheese. No worries.

Denial – At first, Hem and Haw believe the lack of cheese is a mistake. “They” just forgot put the cheese out on this day. The cheese will come back. For the first few days, they return to their regular cheese station.

Anger – In the next stage, Hem becomes angry that the cheese is missing. “We’re entitled to our Cheese. We didn’t cause this problem.” To no avail, they chisel through a wall but find no cheese.

Bargaining – In the next phase, Hem hopes to bring back the previous situation. “Maybe we should sit here and see what happens. Sooner or later they have to bring the Cheese back,” says Hem.

Depression – In this phase, fear and despair set in. Hem says to Haw, “You’re not really going out in that maze again, are you? But what if there is no Cheese out there?”

Acceptance – This is finally accepting the change and taking steps to deal with the new situation. Haw tells Hem, “Sometimes things change and they are never the same again. ….Life moves on. And so should we.” With that, Haw goes out to the maze to search for more cheese. While fearful at first, Haw is steadfast in his determination and ultimately finds new and better cheese.

The stages are inevitable. The part I can control is the speed of passing through the stages. So when change strikes, I remember to be like Haw and quickly get going for the new cheese!!!

Saturday, December 23, 2006

In a previous post, I wrote about the secret to success. One of the key factors was good judgment. One way to gain good judgment is to get a mentor, or to use the Liar's Poker analogy, a jungle guide. Here’s how I use the jungle guide idea in the new hire training I do.

Super Saver: All of you are pretty smart. You all graduated from excellent schools with great majors. Right?

New Hires: Yes... sure.....right.

Super Saver: How many of you would go into the Amazon jungle by yourselves?

About 5% of the new hires raise their hands.

Super Saver: Alright, you are pretty brave. The rest of you know that being smart may not be enough. If you had to go into the jungle, what would you do?

New Hires: (Silence.)

Super Saver: You’d hire a jungle guide, somebody who had done it before. And brought their clients out alive. If you get a good jungle guide, you get out alive. Those of you that do it yourselves……. well, some of you will make it and some won’t. And those of you that make it will take longer than those with jungle guides, and may end up being more tired and worn out that them.

New Hires: (Nod their heads.)

Super Saver: Think about it. Work is like a jungle. Find a good jungle guide. You will be more successful because you will benefit from their experience and good judgment.

During the training, 100% get it and pledge to do something about it. I realize only about 50% remember it after the training, and only about 20%-30% do something about it. However, I am still heartened that I was able to help up to 30% become more successful.

However, if one is more than 10 years from retirement, you may need to make an adjustment to one’s estimated salary. The calculator does not account for the possibility that your salary may grow faster than inflation during your early working years – e.g. due to promotions or job changes. For those that are 10 or more years from retirement, it may be necessary to project what your future salary may be and put the present value in the salary input field. (For specifics on this economic-speak, see example #2 below.)

Another gap I found is that it doesn’t include when social security payments begin and, therefore, it may overestimate how retirement savings is needed. Of course, overestimating savings needed is better than underestimating:-)

This calculator asks for the following information:

1. Salary2. Tax Rate3. Inflation Rate4. Years until retirement5. Projected Lifetime in years after retirement6. Percentage of Income needed after retirement7. Rate for Return on Savings in retirement8. Taxable Savings accounts9. Rate for Return on Savings until retirement10. Tax Deferred Savings11. Rate for Return on Tax Deferred Savings until retirement

After filling out the information, the calculator lets one know whether you have sufficient savings or the amount that one needs to save before retirement.

Example 1 – Will B. Retired is a 64 year old that will retire next year. Here is his information.

Amount needed for retirement. $1,029,256, which leaves Will very short of his target.

Example 2 – Em S. Grad is 35 years old and plans to retire at 65. He has the same information as Will except for #4, which is 30 years. In addition, Em expects to retire as a Division Manager, which has a current salary of $150,000.

Amount needed for retirement: $2,475,939. And the calculator recommends saving $20,461 per year until retirement to reach this goal.

The numbers make sense overall since 30 years from now Em will need about 2 times the Will’s amount to account for inflation. However, the calculator doesn’t account for non-inflation related salary increase. Thus, $2,475,939 should be Em’s minimum retirement savings target.

To account for a higher salary due to promotion or job change, I recommend that Em use the present salary of the position he expects have in the future. For example, if Em expects to be a division manager when he retires, he should input the $150,000 salary of a division manager today. With this adjustment, here is what Em would need for a retirement nest egg: $7,427,816. This would represent the high side retirement savings target.

Disclaimer: Examples are illustrative purposes only. Your results will vary with different inputs and assumptions. As with all retirement calculators, please consult with your financial advisor before taking any actions.

Thursday, December 21, 2006

Although our daughter is only two, I’ve been contemplating about how allowances are done nowadays. I remember getting a small allowance when I was a child and thought it would be a good idea for our daughter. I polled my colleagues and found that virtually no one gave allowances to their children. I was a bit surprised since I thought an allowance helped me learn about managing money. Here’s how I think I will approach an allowance:

Give a weekly allowance equal to one half her age. So a 10 year old should receive 5 dollars per week. Finance-4-Kids and My New Choice both have articles supporting this amount. Finance-4-Kids recommends as much as $1.00 per year.

Divide her allowance into three categories - savings, sharing, and spending. As regular readers know, I believe saving should always be done first. I will start with 40% for saving. 20% will be for long term savings. 20% will be for a future purchase. Sharing will represent charitable contributions. I will avoid the complication of taxes for now:-) I will start with 20% for sharing. The balance, 40%, will be available for immediate spending.

While I will likely wait until she is three to start the allowance, it’s never too soon have her learn about how to handle money:-)

Wednesday, December 20, 2006

A great way to save money is to learn how to do routine home repairs yourself. I can do many minor repair and maintenance items. When we lived in a 100 year old house, we had about $500 to $1000 in savings a year. Now we live in a 20 year old house and probably save about $300 to $500 a year.

Here is an example of a typical do-it-yourself project for me.

Last week our dishwasher stopped draining. The issue had been occurring sporadically, but we had been able to correct the problem by using the “cancel” cycle. This time, we had to manually scoop out the water.

Being an engineer, I am inclined to try to fix things myself. Here are my usual steps to fix something. If these three steps don’t resolve the problem, we call in a professional service.

Look for the obvious. I checked for a clog. In the past, I had removed paper labels, which seem to help the issue. This time I didn’t find anything. If the dishwasher didn’t turn on at all, I would look for typical obvious causes such as blown fuses, tripped circuit breakers, a switch in the off position, or a door not being closed.

Read the instruction manual. Often the answer is available in the “trouble shooting” section. The manual listed a number of issues, but not “water does not drain.” By now, I had concluded that I needed to look into the pump. However, the instruction manual didn’t have a diagram of the pump.

Ask a repair technician. I have found that repair services are willing to diagnose issues over the phone for no charge. The technician immediately asked if a garbage disposal had just been installed. Most people forget to remove a tab that allows the water to drain. Next he speculated the drain tube was clogged. I kept asking about the pump. Although he was pretty sure it was the drain tube, he explained how to access the pump inlet.

To make a long story short, it turned out the technician was correct. The drain tube was clogged with food sediment. It took about a half an hour to take apart the tube, clean it out and replace it. This repair took about an hour since I “needed” to look at the pump:-)

Money saved - $69.95 service call and labor charge ($70 per hour). I know some people consider the fixing thing an economically bad use of time. For me, I consider this $139.95 of “found” money since I can use the money for something else.

To note, I also know my limitations:-) I can change out light fixtures and switches, but not rewire a house. I can install a thermostat, but not a furnace. I can repair a faucet, but cannot solder pipe. For the areas which I have little skill, we hire professionals.

Tuesday, December 19, 2006

This week, I am venturing outside of my normal Personal Finance Carnivals. Listed below are all the Carnivals that I am reading this week. They are a mix of Personal Finance, Personal Development and Family topics.

Monday, December 18, 2006

“The tragedy doesn’t lie in not reaching your goal. The tragedy lies in having no goal to reach” – Benjamin Mays

As I wrote in an earlier post, a first step to financial success is developing goals. My experience shows that setting great goals is often about 50% of the work needed to be successful. If one doesn’t put the necessary work to develop excellent goals, all one’s work may go for naught.

Here are some different examples of personal finance goals with my assessment of effectiveness:

Get rich – Poor. This is too general and vague. It needs more details.

Increase my net worth – Fair. A beginning, but it is not sufficient to be a good goal. There are no numerical targets.Increase my net worth by $10,000 – Good. An amount is specified, but there is no timing.

Increase my net worth by $10,000 in the next year – Very Good. A specific amount is named but the timing is not detailed enough.

Increase my net worth by $10,000 by May 31, 2007 – Excellent. This is the best because a precise amount and exact completion date is given. It is very easy to determine whether one is on track. Also, it can be broken down into smaller goals, e.g. $2,000 per month.

Of course, excellent execution is also important. However, excellent execution against an uncertain target will inevitably miss the mark.

As promised, I am posting this weekend with five things you may (or may not:-) want to know about Super Saver, the blogger. To keep it relevant, I have chosen five items that are related to past or planned posts for the month of December.

My parents deserve most of the credit (or blame:-) for my personal finance thinking. When I was born, my father was a graduate student and my mom stopped working to raise the family. As many of you who have been grad students know, my family was relatively poor compared to many industry employed peers. From my parents, I learned most of what I know about personal finance - live within our means, save part of what we earn, avoid using debt (except for homes), and to buy only what we need.

I am a graduate of Princeton University with a degree in Chemical Engineering. However, even back then, I had an interest in personal finance, as I took several Economics courses as electives. In addition, I was business manager of a Princeton Student Agency. My experience at Princeton is one of the reasons I believe that college should be part of one’s wealth building plans and a reason that I worry constantly about how to cover our daughter’s college costs.

I have been working for the same company (unnamed to maintain anonymity :-) since graduating from college. My work has taken me all over the US, to Asia, Latin America and Europe. We have lived in Japan. The experiences I have gained have been invaluable. My career has been challenging and satisfying. For those of you that are curious, I did not take the highest paying offer, as I recommended in a previous post:-)

My biggest financial worry is whether I have correctly estimated what’s needed for retirement financial security. As you can see from posts on retirement calculators, most tools are woefully inadequate for helping people prepare appropriately. And according to a Wall Street Journal article The Retirement Lies We Tell Ourselves, most people make incorrect assumptions about factors of their retirement. I worry (just a little:-) if I am one of those people and a lot on whether I will be able to carry out all of our plans.

Finally, this blog, along with other elements, are part of investing more in my continual personal growth and reinvention. The increasing rate of change will be a major factor impacting our career and financial security for the future. I am very motivated to make sure my family and my children are fully prepared to handle all the change that will inevitably happen. Other skill elements on which I am working are: creativity, innovation, and strategy development.

Hopefully, this provides some interesting insights about Super Saver and My Wealth Builder. I will pass on making a tag. The additional bloggers I would tag are likely already tagged by others:-)

Saturday, December 16, 2006

The inaugural edition of the Carnival of Thoughtful Consideration is up and running at Thoughtful Consideration with 22 personal finance posts. I like the format of this Carnival. For the personal finance section, it has eight categories: Budget and Saving; Credit and Debt; Education; Jobs, Employment and Income; Miscellaneous Investing; Net Worth; Personal Finance; and Retirement, with each category having 1-5 articles. The organization made it easier to find the posts I wanted to read.

There were many good posts in this first edition. Although it was difficult to choose just one, here is my Carnival pick:

Friday, December 15, 2006

In my post from 12/8/06, I did an assessment of a Nest Egg Score Estimator from A.G. Edwards. My assessment was that the tool covered the right categories, but it seemed a little too generous for a hypothetical 55 year old named Ima Retiring. Dimes from Dimes to Dollars, also tested the calculator and noted that the tool seemed to "discriminate against the young" by giving low scores. I agree with her point on the calculator not being accurate for the young.

To illustrate the point, let’s take a hypothetical 30 year old, Bee S. Grad who is:

1. Married2. 30 years old3. With dependent children4. $60,000 income5. 7 years at the job6. Has a retirement account7. Saves over 10% of income8. Saving more this year9. Taking more risk with investments10. Retire in over 20 years11. Spending 95% of income12. No house13. $40,000 in net worth.

Bee’s score was 636 or Fair. I thought this was too of a low rating for the above inputs given Bee's age. It did not seem to take into account that Bee was early in her career - i.e. the family income, percentage saved and networth would increase with time. For curiosity, I tried a couple of changes to check this hypothesis. In question 2 , a change in age from 30 to 55 and/or reducing years to retirement in 10 years did not affect the score, which remained at 636 .

However, increases in networth (Q13), home equity (Q12), percentage saved (Q7) and decreases in percentage spent (Q11) had significant impact on the score. Home equity increases improved scores by about 10 rating point for each step. Improvements in networth, percentage saved, and percentage spent increased scores by about 20 points for each step. Income increases had a small positive effect on the rating.

My updated conclusion is that this calculator does not provide an accurate rating for people more than 10 years from retirement. The calculator does not take into account changes in the networth, home equity, percentage saved, and percentage spent over time. GolbGuru has also noted the same effect for the Fidelity Retirement Calculator in a recent post at Money, Matter, and More Musings.

One workaround to this issue is to input one's final retirement goals into the calculator. I expect that the calculator will provide a good assessment of whether your goal has a possibility of providing a comfortable retirement.

Disclaimer: Examples are illustrative purposes only. Your results will vary with different inputs and assumptions. As with all retirement calculators, please consult with your financial advisor before taking any actions.

Thursday, December 14, 2006

I’ve noticed that our two year old daughter is developing life skills by watching and copying what we do and say. She imitates many things that we do – including words, actions, and expressions. At times, she mimics sophisticated or subtle actions which she does not yet understand. Since she will copy both “good” and “bad” behavior, I need to watch my actions, words and tone more carefully nowadays.

On the positive side, I have concluded this is a great opportunity to be an excellent role model for what I want my daughter to learn. She is much better at copying my behaviors than doing what I ask of her:-)

For personal finances, here are a few of the behaviors I will model and the outcome I hope will happen:

Since I am not a child psychologist, I don’t know for sure if this will work. But based on several other experiences we’ve had, I believe there is a good chance for success. I promise to report back on our results in My Wealth Builder 16 years from now:-) Photo Credit: morgueFile.com,Anita Patterson Peppers

This is not financial or parenting advice. Please consult a professional advisor.

Wednesday, December 13, 2006

In hindsight, one of my best wealth building strategies was to get a great paying job after graduating. I wish I could claim credit for this strategy, but it was my parents, not me, who put the idea into my head.

Looking back on my experience, here’s how I will advise my children on using a college education for building wealth:

Get knowledge and skills that enable access to higher paying jobs. If one accepts that as important, choose a major to enable getting a higher paying job. In addition, knowledge and skills can be acquired outside of the class room, in extracurricular activities.

Similarly, going to college was a business decision. For me, it needs to “pay out,” through a higher paying job that is greater than the cost of attending college.

A good job provides valuable experience to lead to better jobs. Although I didn’t want a job I hated, I didn’t think my first job had be one that I would love to do for the rest of my life. I wanted to gain new skills and learn from the experience. So I didn’t sweat not getting the perfect job and I applied for jobs that appeared to be challenging, rewarding and a growthful experience.

Take the job with the highest offer. I know that some will disagree. I like the advice from Jeffrey Fox in How to Become CEO. He wrote to always take the job with higher pay. Higher pay generally means more responsibility, higher expectations and future jobs with higher pay.

Sunday, December 10, 2006

In a previous post, I summarized Federal tax credits and income exclusions for an adoption. Tax credits and income exclusions reduce the adoption cost by reducing your taxes in the year the adoption is completed.

On the income side, I found a couple options that can be used to get money for an adoption. In these cases, the money is also provided after the adoption is complete. Here are the additional sources of income that I found and used for an adoption.

Employee Adoption Assistance – The program typically provides between $2000 and $5000 to cover adoption expenses. Twenty-four companies offer as much as $10,000 adoption assistance. Stanford University is among the organizations offering $10,000. Depending on which source of information one uses, between 9-20% of companies offer adoption assistance. Check with your benefits director as to whether your company has an adoption assistance program. Adoption Friendly Workplace has a search tool to find companies in your area that provide employees adoption assistance.

State Grants – In our state, this program is funded by the state and administered by the county. Our state’s program provides up to $2000 to cover out of pocket adoption expenses. It is worth checking if your state has a similar program.

Saturday, December 09, 2006

Over the next month, I will be testing several online retirement calculators and posting my evaluation.

Here’s an assessment of a Nest Egg Score Estimator from A.G. Edwards. It provides a rating for your retirement readiness. Overall, the tool covers the right categories, but it seemed a little too “feel good.” I thought their system was a little too generous in the scores it assigns for each answer and it didn’t include possible answers such as “negative net worth” for question 13 or questions about existing non-mortgage debt.

To illustrate the point, let’s take a hypothetical person, Ima Retiring who is:

1. Married2. 55 years old3. With dependent children4. $105,000 income5. 10+ years at the job6. Has a retirement account7. Saves over 20% of income8. Saving more this year9. Taking more risk with investments10. Retire within 5 years11. Spending 80% of income12. 50% equity in house13. Over a million dollars in net worth.

Ima’s score was 835 or Excellent. I thought this was a reasonable rating.

For curiosity, I tried a couple of changes that I believe are “killer issues” to a comfortable retirement. In question 11 (the percentage of take-home pay spent), a change from “spending less than 80%” to “spending over 100%” only decreased the score by 40 points and Ima remained in the Excellent category. Similarly, a single change of $1,000,000 net worth to $0 net worth reduced the score by 80 points, still barely keeping Ima in the Excellent category.

My assessment is that either change should have reduced Ima’s rating to Fair, or borderline Fair/Good. I must be too conservative when it comes to retirement readiness:-)

Disclaimer: Examples are illustrative purposes only. Your results will vary with different inputs and assumptions. As with all retirement calculators, please consult with your financial advisor before taking any actions.

Friday, December 08, 2006

In new hire training at my company, a question that is often asked, “How can I make my project or career successful?” My answer to them is “Success is based on regularly making good decisions.”

Of course, this begs the question of how to develop the skill of good decision making. I use an explanation shared in the book Liar's Poker by Michael Lewis. The following paraphrases a discussion below between a bond trading trainer and a trainee.

Q: How does one make good decisions?A: Good judgment.

Q: How does one develop good judgment?A: Experience.

Q: How does one get experience?A: Bad judgment.

Good judgment is the important skill to develop. It’s ok to make mistakes, and good judgment prevents making the same mistake twice. The challenge is learning from experience and transforming understanding into good judgment :-)

Thursday, December 07, 2006

Although we have never had any credit card debt, I do and have used other types of debt as a means to cover high cost living needs (e.g. home or car) or long term goals (e.g. education).

House mortgage – This is the only debt we currently have. It also the biggest debt we’ve ever had. For both homes, the mortgage was about 2 times my gross salary. As I’ve written in previous posts, I use vanilla fixed rate mortgages. No ARMs for me. We never paid off the mortgage on the first house. Interest rates were declining at the time. So we refinanced periodically to lower our payment and take out cash for improvements. We currently have a 30 fixed loan for which we are making accelerated payments against principal to pay off the loan in 15 years.

Student loan – When I graduated from a private university, I had loan equal to about one year’s tuition, room and board. The loan amount was about 40% of my gross starting salary. The monthly payment was about 4% of my gross monthly salary. While manageable, I still remember looking forward to day when the debt repayment ended. I paid off the loan after 10 years.

Car loan – After starting my first job, I couldn’t wait to buy my first new car. After driving the 13 year old family car for two years, I purchased my first car with a bank loan. The loan was for about 25% of my gross annual salary. I recall paying off the four year loan about 1 to 2 years early.

I have occasionally used “1 year same as cash” credit deals. However, I now just ask for a cash discount. I have thought about using 0% APR credit card balances to fund investments such as a real estate down payment. However, I have not yet used this approach.

Finally, I don’t assign the designation of good or bad to debt. To me, all of the above uses of debt were just a means to acquire an important and necessary asset in an economically sound way, a business decision as my father would say.

Wednesday, December 06, 2006

As regular readers know, I practice the principle of buying only what I need. I also apply this principle to my gift request list.

Here are the top five items not on my gift request list:

Number 5 – A handheld GPS. Nice, but for $150 to $500, I can still use a standard map. MapQuest does a fine job also. It requires a little planning ahead, but worth saving the money instead of buying a GPS.

If I traveled a lot, I would consider getting one. Using a map for the home area is convenient. Having maps for or getting lost in 50 different cities, would justify paying for a GPS.Number 4 – A Wii, Playstation 3 or Xbox 460. I used to be a video game fanatic. I still love to play my nephew whenever we visit my brother-in-law and his family. (My only chance of winning is if the game is new. Wisdom occasionally beats reflexes in such cases:-) If I had one these game consoles, I would be playing it non-stop. So I don’t have one.

Number 3 – A digital music recorder/player. I like music, but not that much. Mind you, I think the IPod is a great innovation and I own Apple (AAPL) stock. Some of my colleagues have 2 or 3 IPods. From an investment perspective, I’m glad lots of other people like it.

Number 2 – A wide screen (or really wiiiiide screen) HDTV. It’s great technology and I am impressed. However, I don’t enjoy TV that much, I don’t need to see it finer detail to be convinced I don’t enjoy current programs:-)

And my Number 1 non-request is – A fully loaded SUV or luxury car, with the price tag of a small house. Some vehicles have sound systems, video systems, leather and wood paneling far exceeds what I have in my home. However, I don’t want to live in my vehicle. I just want it to get to my destination reliably and safely. A good solid base car or truck that can be driven for at least ten years is more my style.

Just in case anyone wants to send My Wealth Builder a holiday gift , my current request list includes a tie, a bottle of scotch, and a membership to the art museum :-)

Tuesday, December 05, 2006

In my 11/20/06 post, I wrote that I was bullish for the next 6-12 months and would be increasing my stock holdings over the next couple weeks. As of today, I still have not made any purchases. I was evaluating 20 stocks that met the first and second factors of my buy criteria. However, only one stock, Morgan Stanley (MS), met the third and fourth factors. I did not buy MS since I believe the financial service sector is near a peak. Even though I wanted to increase my exposure the market, I followed the model and did not buy any of the other 19 stocks.

As it turns out, the market declined slightly since Thanksgiving, which has made some stocks more attractive buys. As I wrote on 11/20/06, I am still bullish. This weekend, I will analyze stocks that meet my buy criteria and determine whether to make any purchases.

Monday, December 04, 2006

Carnivals have a wide variety of content from many bloggers. I find that Carnivals are a good place to get new ideas that I can use for my own wealth building plans. The following Carnivals have been posted and include some great ideas for building wealth:

The Tax Carnival #7 is hosted by Don’t Mess With Taxes and has 19 submissions. My Carnival pick 'Tis the Season at Hill’s Personal Finance is about maximizing tax deductions by make non-cash charitable contributions.

The Carnival of Investing #50 is hosted by Stock Market Beat and includes 26 submissions. My Carnival pick is Five 401(k) Mistakes to Avoid at Money Crashers. I agree 100% with 4 out of 5 recommendations. For number 3, I think people should worry about both how much AND where to invest.

Saturday, December 02, 2006

For inspiration on eliminating debt, read about success stories in the MSN.com article Huge Debts, Paid Off Fast. Greg Cards will pay off $154,000 in about six years on a base income of $60,000 per year. Bethany and Stephan Gordon retired $150,000 of mortgage debt in five years, with an initial income of $55,000 per year. How did they do it?

According to MSN.com, among other things:

They made debt payoff a priority, although most continued to save for retirement as well.

They kept their basic living expenses as low as possible.

They looked for creative ways to speed up their debt repayment, and some took extra work. (Cards, for example, volunteered for overtime and took a second job.)

It wasn’t easy for any of them. I am inspired by their commitment to achieving their goal. They all had the vision and will to be successful.

Friday, December 01, 2006

On average, healthier people are wealthier. Several studies have shown a positive correlation between state of health and amount of wealth. The University of Michigan published a study about this relationship in 1996. Yahoo! recently published an article on a new study by the British Medical Journal that reconfirmed the findings.

Of course, statisticians will point out that a cause and effect relationship isn’t clearly established – i.e. does good health lead to wealth or does wealth lead to good health? (For example, the Yahoo! article also noted there was a correlation between height and wealth – i.e. taller people were wealthier.) Personally, I’m not going to wait to find out if “cause and effect” is one way or the other. I’ll work on improving health and wealth and cover both options:-)

Thursday, November 30, 2006

In addition to following several personal finance weblogs, there are four financial publications that I read on a regular basis. There are many good publications, but most are not as innovative or relevant as I would like. The following are the publications that I think have the best relevant, cutting edge business/finance articles and the most variety.

Here are my daily reads:

The Wall Street Journal – This is the grand daddy of financial publications. I read it daily. I focus mainly on two sections, the front page and the Personal Journal section. The front page highlights the worldwide and financial news. The Personal Journal section was created in the past year and provides articles on personal finance. My favorite writer in the Personal Journal section is Jonathan Clements.

Yahoo! Finance – This is a good all around financial website. I originally used Yahoo! Finance to get quotes for my stock portfolio. It’s easy to use and provides a wide variety of information on the equities. I also enjoy the variety of columnists, my favorite being Laura Rowley. The weekend edition does a great weekly roundup of stories. At this time, I primarily read the Home and Investing tabs.

Here are my weekly reads:

Business Week – This is a weekly magazine on business trends, business success stories, and innovation. I read it to keep current in these areas and to get ideas for my work, career and personal finances.

Investors Business Daily – I read the Monday Special edition whenever I get a chance. I enjoy checking the IBD 100, their recommendation of the top 100 stocks. In addition, I like to get insights and ideas from their segments on Success, Leadership and Investing Criteria.

Wednesday, November 29, 2006

Selling an investment is a hard but important skill to learn. Many investments will have good returns for only a few years, 10 years if it is outstanding. Recall Enron and Worldcom. Yes, they were scandals but the same advice applies to good companies. Also off note are Dell, Microsoft and General Electric, which are still less than 30% of their peak which happened in 1999 to 2000.

Here are some guidelines I use on when to sell stock investments:

After a significant short term jump in the price. When the stock price jumps 20%+ in one day, it often is not sustainable. If a stock jumps 50%+ in a week it is often not sustainable. More often than not, it is better to take the profits at such a point. If you’re wrong, you can always get back into the stock at a later time. If you’re right, you avoided losing a portion of your profits.

When the general market or the sector is weak. "Don’t fight the tape" is a famous stock market adage. If the market or sector is in a downward trend, it’s a good time to sell. If the stock has dropped, try to sell during one of the short term rallies that normally occur during a down trend.

When it is no longer a buy. I have several criteria for determining whether a stock is a buy or not. When a stock no longer meets those criteria, I start looking at opportunities to sell it. If the stock is still rising, I will sell when it appears to have peaked. If it has dropped, I will try to sell into a rally.

When the company's business model is no longer a competitive advantage. Microsoft and Dell established a significant competitive advantage in the 1990’s with their business models. Microsoft owned the software market because of their dominance in operating systems. Dell’s supply chain management and ability to build to order enable it to mass customize more powerful computers at lower prices. However, Google may make Microsoft obsolete and the rapid commoditization of computers my obsolete Dell.

With the rapid global and market changes occurring in retail, Wal-Mart may be another successful company that loses its strategic competitive advantage in the near future.

One risk of using these guidelines is selling a stock too early. However, it is always possible to buy the stock again if the sell decision proves wrong. On the other hand, being an optimist sometimes keeps me from selling a stock that meets the criteria, resulting in a greater loss.

Monday, November 27, 2006

There have been some comments on different personal finance weblogs that too much writing is devoted to savings and frugal living and not enough to increasing income. While I agree increasing income is important, frugal living is often the more important component. People should achieve a frugal lifestyle (preferably first:-) or an increase in income may not be sufficient to help their financial situation.

Here are two stories about different families which have been told to me.

Two families – One military and one civilian.

When my wife was a child, her family lived across the street from a civilian family. Both families had two children. It was clear the civilian family was having a difficult time financially. Often, they would run out of money for groceries at the end of the month.

My father-in-law was an Air Force captain and they had a modest military income. However, they helped their civilian neighbors by passing along their children’s clothing after my wife and her brother outgrew them.

My in-laws became good friends with the other family. One day, the civilian wife mentioned that she didn’t know how a family of four could live on their income and told my mother-in-law a number. Imagine my mother-in-law’s surprise when the number was higher than her own family’s income.

Frugal Living -1 Higher Income – 0

Two Families – One dual income, no kids (DINKs) and one with children

A colleague of mine shared a story about her daughter and son-in-law. They were renting a house and saving money to buy one. They lived near a family with children. Based on their jobs, my friend’s daughter knew that she and her husband had higher salaries. As DINKs, they also assumed they had lower expenses than a family with children.

Within a couple years, the family with children bought a house and moved out of the neighborhood. My friend’s daughter couldn’t believe that the family had purchased a house first. My colleague observed that the family was likely saving more, since her daughter regularly spent money on eating out, entertainment and customizing their cars and motorcycle.

Frugal Living -2 Higher Income – 0

Of course, these stories are not necessarily representative. However, the point is that frugal living always helps ones financial situation. Depending on one’s spending habits, higher income may or may not be of sufficient help to one’s financial situation.

About Me

My wealth goal is to create a guaranteed yearly income stream equal to my highest salary for my retirement years. While I have developed a strategy to do this,
I am interested how others are thinking of achieving financial security for retirement.
This blog is a summary of facts, ideas, discussions, and action plans to achieve that goal.

Disclaimer

This is a personal blog about my thoughts, experiences and ideas on building wealth. The contents of this blog are for informational purposes only. No content should be construed as financial advice. Commenters, advertisers and linked sites are entirely responsible for their own content and do not represent the views of My Wealth Builder. All financial decisions involve risks and results are not guaranteed. Always do your own research, due diligence and consult your own professional advisor before making any decision. My Wealth Builder assumes no liability with regard to financial results based on use of information from this blog.

If this blog contains any errors, misrepresentations, or omissions, please contact me or leave a comment to have the content corrected.

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Disclaimer:
This is a personal blog about my thoughts, experiences and ideas on building wealth. The contents of this blog are for informational purposes only. No content should be construed as financial advice. Commenters, advertisers and linked sites are entirely responsible for their own content and do not represent the views of My Wealth Builder. All financial decisions involve risks and results are not guaranteed. Always do your own research, due diligence and consult your own professional advisor before making any decision. My Wealth Builder assumes no liability with regard to financial results
based on use of information from this blog.

If this blog contains any errors, misrepresentations, or omissions, please contact me or leave a comment to have the content corrected.